Productivity and real wages revisited

Before the recession hit, the overriding concern for the Canadian macroeconomy was our poor record of productivity growth. As the recovery progresses, we can expect this discussion to move back to the forefront of policy debates.

When we talk about the importance of productivity, the point is invariably made that increasing output per worker is the only sustainable way of generating long-run gains in real purchasing power. But it turns out that it is possible to have extended periods of time - decades, even - in which increased productivity isn't sufficient to generate real wage gains. And sometimes, it's not even necessary.

Here is a graph that explains why we're so concerned about productivity:

Canadian productivity growth has averaged just over 1% per year in log terms, and has increased barely at all in the last decade. Meanwhile, output per worker in the US has been growing almost twice as fast. One percentage point per year may not seem like much, but the cumulative effect over a span of decades is a very big deal indeed.

(I should hasten to add that higher US growth rates are not a problem for Canada per se: their gain is not our loss. But it raises the question of why an economy that is so similar to ours in so many ways can produce consistently higher rates of productivity growth. Wouldn't it be nice if Canadian output were 30% higher than it is now?)

It seems difficult to reconcile the US record of strong productivity growth with the widespread narrative of stagnant real wage growth over the past few decades. Standard theory of the firm would predict that real wages would track marginal productivity (which is proportional to average productivity in the widely-used Cobb-Douglas model), and the data seem to track this prediction reasonably well. So why do workers feel as though they aren't progressing?

The explanation is the choice of the price index used to calculate real wages. As far as the firm is concerned, the relevant price is the output price, but workers would measure their buying power in terms of the consumption goods they can purchase. At the macro level, it is convenient to characterise this distinction as being the difference between the GDP deflator and the CPI. It turns out that using the GDP deflator generates a real wage series that tracks productivity fairly well, but using the CPI to calculate purchasing power yields a very different pattern:

The corresponding graph for Canada is quite different, and not just because it's noisier:

After an extended period of essentially no growth, real wages (in CPI terms) have been tracking productivity for the past 10-15 years in Canada. In fact, the buying power of Canadian workers has been growing faster than that of American workers over the past 10 years, notwithstanding the significantly more rapid growth in US productivity.

There are any number of stories to be told here, and most of them would involve oil prices and exchange rates. But for the purposes of this post, these graphs illustrate the importance of the ratio of the prices of production and consumption goods. This ratio is rarely mentioned in macro (and is usually assumed to be equal to 1), but from what I gather, the development literature calls this the 'labour terms of trade'. Movements in this ratio can accentuate, attenuate or even reverse gains due to increases in productivity.

Here is a graph of the Canadian and US labour terms of trade:

I don't know what was happening to Canadian productivity before 1973, but even if there was no growth in output per worker, the increase in our labour terms of trade would have induced significant gains in real wages. (The Canadian data before 1961 are not directly comparable to those in the main sample, but they suggest that the pre-1973 trend goes back until at least 1950 or so.) And the story in the US is especially stark: the net effect of the post 1973 deterioration in the labour terms of trade was to reduce workers' buying power by some 20% in log terms.

So yes, it's important to focus on productivity. But it's also important to remember that it's hard to translate productivity gains into increased purchasing power when producer prices are growing more slowly than consumer prices.

Comments

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Stephen:

Fascinating analysis, it does put in perspective the whole debate about Canadian productivity. Discussing the topic on s lightly more political/economic scope, I wonder if the decline you see in America can be linked to the opening of China's economy, where marginal producers in America have been replaced by high performing Chinese producers (because of lower wages)the result has been to see the average wages of "more profitable" producers be eroded to take this production shift to China -- thinking of the Chinese labor pool as an addition to the American labor pool bringing down wages across the board.

The next most beneficial change would be to reduce the statutory rate of corporate income tax. This increases economic well-being by promoting business investment resulting from increased after tax returns to capital. Greater business investment increases worker productivity – which increases wages – and expands the number of jobs. According to the Department of Finance, the benefits from a cut in corporate income taxes may be under stated as their analysis does not capture the effects of multinational firms rearranging their tax reporting so that more profits would be “booked” in Canada. While economic activity would not increase as a result of shifting reported earnings, tax revenues would increase. Consequently, the impact on lost tax revenue may be over stated – and the benefit therefore under stated.

Consider eliminating corporate income taxes.However beneficial each of the foregoing
measures would be, eliminating the corporate
income tax could be a much more innovative
approach to increasing productivity and prosperity.
Governments in Canada should explore
this fundamental shift to a potentially smarter
tax system.
A corporation’s taxes are actually paid by its
workers whose wages are lower than they
would otherwise be; by its customers who must
pay higher prices; and by its stockholders,
including individuals’ pension funds and
mutual funds in their RRSPs. Eliminating
corporate income taxes has the potential to
enhance prosperity by increasing wages, lowering
prices, and increasing investment returns.
This is an unconventional solution and further
research is required to assess the long-term
impact on tax revenues, earnings patriation by
foreign companies, and other issues. But we
encourage the Ontario and federal governments
to examine this approach further.

Note: it is not saying to go this route. It is suggesting to study it. There is a difference - which should not be so subtle a distinction.

"A corporation’s taxes are actually paid by its
workers whose wages are lower than they
would otherwise be; by its customers who must
pay higher prices; and by its stockholders,
including individuals’ pension funds and
mutual funds in their RRSPs."

Isn't every one of these statements only true to a degree determined by the relevant elasticies? Or am I misunderstanding something about how shifting burdens get allocated?

MM, btw, that study was completed over 5 yrs ago - and I believe much has changed in Canada (taxes included) since that time. Perhaps some of the recommendations have already been implemented (HST in Ont for example). The Sept 2010 report seems more relevant to the blog topic at hand.

" Perhaps some of the recommendations have already been implemented (HST in Ont for example). "

And corporate capital taxes for another, so yes, there has been changes.

"The Sept 2010 report seems more relevant to the blog topic at hand."

Well, you brought up corporate income taxes. Working Paper 14 is on "trade and innovation" whereas Working Paper 7 is on "taxing smarter", so it's not surprising that the corporate tax issue would be in the working paper about taxes!

I do not see cutting corporate taxes across the board as being a key recommendation to improving Canada's poor innovation/productivity.

Note the relative word - "key".

OTH, I would suggest that reducing Canadian corporate taxes is a KEY theme of this blogsite. There is a disconnect when it comes to productivity/innovative initiatives. Now, if you were to advocate targeted tax incentives for investments /training etc., well, that is different - and smarter.

The next most beneficial change would be to reduce the statutory rate of corporate income tax.

Yes, lets do more of the thing that's causing the problem. A major factor in the stagnation of Canada's productivity has been the steady reduction in corporate taxes over the past decade. Corporations have been able to increase their bottom line by simply paying less tax instead of implementing often times risky innovation strategies. Jim Stanfield has been pointing out for years now that corporations are not reinvesting these tax savings into increasing productivity but instead into growing ever larger cash surpluses.

This is very good and very thought-provoking. How *can* the CPI and GDP deflator diverge so much??

OK, some of GDP is exported, and some of CPI is imported. But most of Canada's exports are to the US, and imports are from the US, so our "labour terms of trade" should roughly mirror theirs?? Plus, trade is only about 40% of GDP anyway, so it would take a really big change in the international terms of trade to have much effect on the labour terms of trade. My mind is searching for some kind of concrete example which has moved enough to let me get my head around this.

Yep, I'm one of those macroeconomists who subconciously assume it's 1.0.

Stephen's point about Canadian managerial competence is relevant here. The hardest way to be more competitive is to get better at what you do. This requires admitting that management isn't currently doing as well as it could/should, which would in turn raise the question "then why are we paying you so damn much?".

So the question becomes what is the key variable between the four data sets under consideration (US GDP Deflator and CPI, Canadian GDP Deflator and CPI).

Given the ratios one would conclude that there has been flat prices in the GDP Deflator or rising prices in the CPI. I believe it has been the latter. It also has to be a variable between the two countries.

Off the top of my head, housing costs and health insurance would be the two greatest market differences from a consumer perspective between the two countries with a large enough weight to move the index like that.

This theme pops every few years. I recall studies in the past pointing to different industrial structures. The US is IT-heavy for example.

I think the reasons for the slow productivity growth reside in several areas:

- the commodity boom,
- a welfare state that either pays people not to work or pays them to over-exploit resources, and
- special-interest driven immigration and refugee programs.

Think about the commodity boom and the increased cost of permitting resource projects. Productivity goes down, prices go up and everybody still gets rich including an army of consultants who were largely absent 40 years ago. As a consequence, non-resource activities are crowded out by higher real exchange rates. Lower production production typically means lowered rates of measured productivity.

Does the USA or European countries have a fishing category Employment Insurance program that effectively subsidizes so-called commercial fishermen to overfish? They overfish and Canadian taxpayers are bailing out local regions for years if not decades to come.

Are Canadian pay-roll taxes higher than elsewhere? The Chrétien Liberal government would not cut Unemployment => Employment Insurance premiums because the public didn't care (according to the focus groups).

Given how the immigration and refugee programs are structured, it is hard to imagine recent immigrants contribute positively to Canadian productivity. Doesn't it take about 12 years for immigrants to start making a positive contribution the Canadian economy? The recent thrust in both immigration and refugee programs has to been to create exceptions so people who would not normally qualify under the point system can come in.

AFAIK... the theoretical justifications that the incidence of corporate taxes is largely on labour are arguments relating to open economies. I.e. if we raise the rate, capital will flow out of our economy and the burden will fall on domestic labour. This makes sense. Studies that support this conclusion include regressions on international corporate tax rates (see eg: http://www.kansascityfed.org/Publicat/RegionalRWP/RRWP07-01.pdf). So cutting corporate taxes is good for labour. Domestic labour, that is.

But in a closed economy, the tax incidence is well understood to fall on the owners of capital (not just corporate equity), and not on labour. So a competitive reduction in corporate tax 1) shifts the domestic tax burden from capital to labour; 2) makes up partially for that by shifting wealth from foreign to domestic workers. Maybe that's a good trade. But in a competitive world, if we all do it, it will only have the impact of shifting taxation from capital to labour. I will probably improve efficiency. But if the efficiency improvements come principally from capital investments, it's a pretty tall order to prove that the benefits will get paid (trickle down?) to labour. As this post shows, they haven't done so in the past.

I'm all for tax changes that improve efficiency, so cutting corporate tax rates seems like a good idea. But unless the intention is regressive taxation, it needs to accompanied by offsetting adjustments. (E.g. Carbon/land/natural resource taxation + a citizens dividend).

westslope: on productivity immigrants probably don't contribute much. On competitiveness, they probably contribute a lot since it's a source of cheap labour for work most Canadians won't do. I don't imagine the welfare state has much effect, at least where productivity is concerned. I could be wrong but it seems to me that someone likely to contribute to productivity in a big way is likely to have a relatively large marginal product and thus would likely prefer to receive that marginal product (or something approximating it) in wages rather than settling for welfare. And in the long run EI probably helps productivity by allowing workers time to optimize their search for a job that best fits their skills, thus increasing productivity. The welfare state is probably negatively impacts competitiveness since people who would otherwise be cheap (unskilled) labour can opt to do nothing instead. But these days they mostly end-up doing nothing even if they would prefer to work, so I'm not sure how big the effect really is.

I might be out of my depths here, but I'm going to venture a suggestion. I wonder if the US's record of productivity outperforms Canada's because the productivity measurement is a mean, rather than a median.

As I understand it, productivity ~ GDP/#hours worked (or possibly a subset of the GDP). However, GDP can include totals from extremely efficient productive enterprises which do not employ very many workers. Is might be that the US has a higher percentage of these extremely efficient enterprises, which would skew the overall mean estimate of productivity. A median estimate of productivity might be more appropriate.

The above effect is clearly visible when comparing GDP/per capita between the US and Canada. Using mean values suggests that Canada lags the US by about 17%(2009 data Wikipedia, but if one uses median values, the gap drops to about 7% (see this Mark Thoma blog for the Distribution of Income in OECD Countries.

I wonder if a similar effect would be seen in the productivity numbers if medians were used?

Patrick wrote: "westslope: on productivity immigrants probably don't contribute much. On competitiveness, they probably contribute a lot since it's a source of cheap labour for work most Canadians won't do."

---------------------------------

"Competitiveness" What's that?

First, Canadian workers will do anything for the right price. Second, cheap labour typically implies low productivity. This notion that cheap immigrant labour is a "good thing" is very popular. The popular notion of writing off Canadian workers as lazy or unwilling to work for low wages suggests that current welfare state transfers and other income-earning opportunities are very attractive.

I do not see a problem with the concept of a state-run transfer program for employees who unexpectedly lose their employment. The Canadian system is not actuarially fair and subsidizes high unemployment rate sector workers and seasonal workers. It also provides maternity and paternity leave benefits.

Incidentally, productivity growth and per capita wealth growth are not always correlated. Isn't it the per capita wealth a more important goal? Or is getting individually rich quick a more important goal? For example, ask yourself why Alberta has an unemployment rate of ~7% when it used to average 3-4%.

westslope: You kinda lost me. I pretty well agreed with you on productivity. Not sure what you're getting at.

BTW, AB has 7% unemployment because lots of big projects were cancelled and because of shale gas killing the price of NG. Projects are starting-up again, and the relatively high unemployment in the process of reversing itself. My guess is that we'll be back to 4-5% unemployment in not too long.

Low natural gas prices are the immediate reason for the higher rate of unemployment in Alberta. The quick tempo of the preceding boom is what I had in mind. If the pace of growth had not been so quick, the number of idled workers and other idled productive capacity would not have been so great.

It wouldn't be such a big deal if the private sector self-insured 100%. It doesn't. The public sector does.

Sorry for talking around the competitiveness issue and the resulting confusion. From an economic theory perspective, competitiveness is either meaningless rhetoric or requires further definition.

Are lower-wage immigrant workers key factors to the success of many internationally sensitive sectors? Perhaps. As cheap unskilled and semi-skilled labour is common throughout the world, I would presume the sectors you have in mind are highly competitive in the sense that barriers to entry are minimal if not non-existent throughout the globe. Strikes me as zero-rent activities.

Why would Canadians invite outsiders to work in low-wage, zero-rent activities? Recall that these immigrants and new Canadians are entitled to all the same public services as everybody else. Of course, low-wage, zero-rent sectors abound. And there is nothing inherently wrong with them. But why use public policy to risk slowing collective wealth accumulation?

If policy is going to favour sectors, should it not favour hard to penetrate sectors requiring highly skilled labour so the resulting wages, profits and taxes are rich?

Measurement issues still abound. Statistical agencies are still approximating public agency output by adding up the costs. Surely the public service has enjoyed massive productivity increases in recent decades but that doesn't get reflected.

Services are almost as tough to measure and relevant productivity measures are not always obvious. Of course, the US economy has a large and growing service sector and it still looks good by comparison.

In recent years, Hedonic price deflators of computers and similar have proved up some nice productivity growth rates for the USA. The gold bugs point to these quality adjustments as reason to suspect that the estimated inflation rate is far below the true inflation rate.

If you were to subscribe to the belief that Canada's continuing success is based to a great degree in expanding trade with the BRICs (Brazil, Russia, India, China) as outlined in the discussion paper earlier noted, then integrating skilled/qualified immigrants from these countries into Canadian business seems to be of strategic importance.

The fact that they aren't to an acceptable extent is also a damning indictment of Canadian management.

Hopefully, I have gotten rid of the security tools virus and its leftover redirect.

"It seems difficult to reconcile the US record of strong productivity growth with the widespread narrative of stagnant real wage growth over the past few decades. Standard theory of the firm would predict that real wages would track marginal productivity (which is proportional to average productivity in the widely-used Cobb-Douglas model), and the data seem to track this prediction reasonably well. So why do workers feel as though they aren't progressing?"

Does "standard theory" consider the possibility that the labor market is oversupplied so that real wages are negative and currency denominated debt is used to maintain spending?

See this link titled "The origins of the economic crisis" at billy blog:

"In the past, the dilemma of capitalism was that the firms had to keep real wages growing in line with productivity to ensure that the consumptions goods produced were sold. But in the recent period, capital has found a new way to accomplish this which allowed them to suppress real wages growth and pocket increasing shares of the national income produced as profits. Along the way, this munificence also manifested as the ridiculous executive pay deals that we have read about constantly over the last decade or so.

The trick was found in the rise of “financial engineering” which pushed ever increasing debt onto the household sector. The capitalists found that they could sustain purchasing power and receive a bonus along the way in the form of interest payments. This seemed to be a much better strategy than paying higher real wages. The household sector, already squeezed for liquidity by the move to build increasing federal surpluses were enticed by the lower interest rates and the vehement marketing strategies of the financial engineers. The financial planning industry fell prey to the urgency of capital to push as much debt as possible to as many people as possible to ensure the “profit gap” grew and the output was sold. And greed got the better of the industry as they sought to broaden the debt base. Riskier loans were created and eventually the relationship between capacity to pay and the size of the loan was stretched beyond any reasonable limit. This is the origins of the sub-prime crisis."

"The explanation is the choice of the price index used to calculate real wages. As far as the firm is concerned, the relevant price is the output price, but workers would measure their buying power in terms of the consumption goods they can purchase. At the macro level, it is convenient to characterise this distinction as being the difference between the GDP deflator and the CPI. It turns out that using the GDP deflator generates a real wage series that tracks productivity fairly well, but using the CPI to calculate purchasing power yields a very different pattern:"

IMO, people should junk CPI and the GDP deflator. A lower/middle class person's budget should be used. Here in the USA I would say that most people making $25,000 to $60,000 per year have had a personal budget price inflation rate of over 4% in around the last 10 years.

Shouldn't you be using the PCE and GDP deflators to calculate the labour terms of trade? When you use the CPI and the GDP deflator you're comparing a fixed-weighted series with a chain weighted series.

Out of curiosity, how would the output of people paid under the table show up in those charts? My understanding is that the US has a substantial and growing workforce consisting of undocumented immigrants from Mexico and Central America.

If productivity = (GDP produced by everyone)/(hours put in by documented workers), then the calculation is flawed.

If both the output and the labour of the undocumented were missed, measured productivity would be the same as actual *only if* the undocumented had the same wages on average as the documented. If the undocumented had lower wages (plausible?) then an increase in undocumented workers would make measured productivity increase faster than actual. And if undocumented workers got laid off first in the recession, measured productivity would fall more than actual.

Are undocumented workers more likely to get laid off early in a recession? Do you have data to support that?

If I recall, unskilled and semi-skilled workers are more likely to get laid off early in a recession. If undocumented workers possess low skills, then one would expect economy-wide average multi-factor productivity (MFP) to grow slower over time as undocumented worker flows their portion of the total labour market grow.

"If you were to subscribe to the belief that Canada's continuing success is based to a great degree in expanding trade with the BRICs (Brazil, Russia, India, China) as outlined in the discussion paper earlier noted, then integrating skilled/qualified immigrants from these countries into Canadian business seems to be of strategic importance.

The fact that they aren't to an acceptable extent is also a damning indictment of Canadian management." -Justvisiting

As Venezuela's president Hugo Chavez set about politicizing and otherwise sabotaging Venezuela's oil industry, many executive and sector professionals fled to Canada. That's one way of getting some extremely valuable and productive human capital into Canada. (Some of them are now managing successful oil exploration and production companies in Colombia which is for all intents and purposes an emerging economy like the BRICK economies.)

We can solve this failure of corporate culture by helping foster the fortunes of populist authoritarian left-wing visionaries like Hugo Chavez around the world.

Intifada I and II helped shake lose a few bright Israeli entrepreneurs that shone, particulary in the hi-tech sector. Successful, precision aerial-bombing of civilians in the Mid-East nets us the odd well-educated American. I see lots of possibilities to compensate for the notion that some Canadian management teams may be failing "us".

Frankly, I gotta wonder if many in senior Canadian management in certain sectors and specific companies are simply intimidated by bilingual, multilingual folks who are inevitably bi-cultural and multi-cultural and, heaven forbid, may not share the identical value set. Perhaps those plexi-glass ceilings are sticky?

Look at the federal government. It still gives plumb jobs to western Canadians who are supposed to be able to function in French but cannot.

Does making inflation adjustments account for these stats:
as of early 2007, 25% of the American workforce was earning wages lower than LBJ's 1968 federal minimum wage ($10/hr, adjusted);
that since 1968, as average income doubled in America, the median wage only advanced 20%, from $12.50/hr to $15/hr?

Incidentally, even average Wall Streets gamblers didn't get the 15% of income share that shifted from the bottom 90% to the top 3% of earners (apparently mostly to the top fraction of 1 percent) -- 180,000 Wall Streeters only averaging $300,000/hr in 2007 (average $180,000 bonuses + average 120,000 salaries) -- average top one percentile household income being $1.2 million ( http://www.cbpp.org/cms/index.cfm?fa=view&id=2789 ) in 2006. IOW, the disastrous shift took place with no healthy economic purpose at all.

Economics is far too full of models that treat the world as if all countries make the same single output good, only some are better at making it than others.

In the real world, of course, different countries make different goods. I think it is very important to think about how the prices of those goods would be set in a world where activities cluster. You just can't treat such a world in a sensible way using those single output good models.

So it's great to see people actually thinking about prices and their measurement and their effects on the measure of "productivity".

As Stephen's post implicitly acknowledges, the terms of trade effect is about industrial (export) composition differences. Sure it's nice to have oil when the price of oil is going up, but (resource curses aside) there's no reason we shouldn't have that AND real productivity growth in other sectors. Like most Canadians I have not experienced much real welfare gain from the appreciation in oil prices, nor from the appreciation in the Canadian dollar. I'm pretty much hedged against the latter, and definitely short on the former. Maybe I should move to Fort McMurray - or spend more time on holiday in New York!

Mike Moffatt said: "According to the Department of Finance, the benefits from a cut in corporate income taxes may be under stated as their analysis does not capture the effects of multinational firms rearranging their tax reporting so that more profits would be “booked” in Canada. While economic activity would not increase as a result of shifting reported earnings, tax revenues would increase. Consequently, the impact on lost tax revenue may be over stated – and the benefit therefore under stated."

Sounds to me like nothing other than an excuse for a race to the bottom in corporate taxes so that lower and middle class people get stuck paying the taxes.

Assuming tax revenues rise (an assumption I may or may not agree with), would they be used to lower currency denominated gov't debt? I doubt it.

Lastly, do I get to shift my wages and/or other income around to find the lowest rate? I doubt that too.

"Both books were reviewed in the UK Guardian over the last few days. The UK Guardian also carried a review of Will Hutton’s latest book by Robert Skidelsky (September 25, 2010) – Them and Us: Politics, Greed and Inequality – Why We Need a Fair Society by Will Hutton.

Skidelsky, who was Keynes biographer said that Hutton’ book is another “passionate and erudite proposal to fix Britain’s broken economy”. I haven’t read this book so I will leave my judgement of it for another day.

The e-book traverses a similar theme to that developed in my blog last year – The origins of the economic crisis. It notes that wage share in the UK has fallen dramatically over the last three decades and that:

The rising wealth and income gap has been a relentless trend that three Labour administrations have failed to reverse.

The manifestation of this rising inequality is to be found in the fact that “(w)ages for most of the population have been falling behind the growth in productivity, and at an accelerating rate”. This is not a trend that is confined to the UK. This has been the hallmark of the neo-liberal period and is a significant causal factor in relation to the financial crisis.

The declining wage share has meant that more real output (income) has been able to be expropriated by capital and these expanding surpluses, accumulated at the expense of the workers who created the product, became the gambling chips for the rapidly expanding financial sector.

We were all fed the story that this was the path to wealth for all of us. For a while, nominal wealth did grow although its distribution did not become fairer. But the financial crash wiped out significant portions of accumulated wealth that workers had accumulated. The top-end-of-town however has been less damaged.

Further, as the wage share has declined the distribution of wages has become more unequal with an:

… increasing concentration of earnings at the top … real earnings have risen much faster for high-earners than for median- and low-earners. As a result, the brunt of the falling wage share has been borne almost entirely by middle- and lower paid employees, with the bottom two-thirds of earners facing a shrinking share of a diminishing pool.

Again, this is a trend among most advanced nations. In part, it has been due to the growth of the FIRE sector."

One question about productivity in recent years that I've been thinking about is how the investment in and development of Alberta's oil sands might skew this. Those projects require massive upfront investment in terms of time, training, manpower and money but the output doesn't occur until years later. As far as I (and a few colleges) can figure, the Canadian productivity data seems to be blind to this.

I have a hunch that as some of these mega projects begin to come online over the course of the next 2-5 years there could be a noticeable impact on the productivity data since there will now be a large about of output for relatively few hours worked.

Does anyone know of a source where they keep track of oil sands projects and when they're supposed to start production?

Why is that relevant? It begs the question: How are you measuring productivity in the graphs presented? I assumed it was measured output/measured input.

If you are simply dividing GDP (or whatever)/hours worked why would all the hours spent by engineers, support staff, contractors, workers not already be included in the graphs before the oilsands operation comes into effect? They add value, reflected in their firms profits/taxes, and I presume are already reflected in the graphs presented.

Well, if you're going to single out the oilsands sector, then you would need to also take into account conventional oil/gas production - which is declining and increasingly more costly to produce. So, a decrease in productivity?

At best, a shift in "productivity" gap of a few months when the impact of the delay is factored into the overall Canadian economy. And only if the accelerated investment in oil sands has been recent - which is not the case.

The thing we're remarking on is the relatively long delay between when the investment expenditure is made, and when it becomes a productive asset. Same as if (say) GM were building a new assembly complex that takes years of investment spending before a car rolls off the line.

But, if you adopt a fundamental cornerstone of economic thought (I will reserve judgment) that all investment eventually converges to the world rate of return, why single out a particular industry?

Oil sands investments should not be any different than any other. Say investors require 15% Rate of return. If it takes five years of upfront development (with its attendant inflated costs) and purchasing of equipment for an oil sands development, then the higher GDP in upfront costs will be offset by higher returns later on to investors, to give them the 15% return ,time value of money etc,.

It all evens out, if you assume world rate of return to investors, irrespective of the time profile of expenditures/revenue.

Sure. But in the short run, timing issues can make the output/worker ratio fluctuate before it gets to the long-run trend. In the very short run, we see lots of people working, and little oil produced. Later, fewer workers, and more oil. In the long run, these do average out.

It's not the oil sands per se. It's just the timing of investment and output.

I'm all for tax changes that improve efficiency, so cutting corporate tax rates seems like a good idea. But unless the intention is regressive taxation, it needs to accompanied by offsetting adjustments.